Turgeon Chapter 4 Case Study
Setting Tuition and Financial Aid
Chelsea Turgeon
MBA 540 – Managerial Economics
May 18, 2014
Table of Contents
Determinants of Demand 3
Inelastic Demand 3
Misperception Theory 3
Recommendations 3
References 4
Determinants of Demand Elasticity
There are a few determinants of the elasticity of demand, one being the availability for substitutes. From the case, the data that was provided for previous studies of student’s application to colleges, projects an upward sloping demand curve. Students have many choices when choosing a liberal arts college. From the data previously taken, when the cost is higher, students believe it must be a better school.
Inelastic Demand Demand elasticity measures the percentage change in demand given a percentage change in its price (Brickley, et al., 2009, p. 111). When evaluating Susan’s analysis, it is important to first recognize what the arc of elasticity is from her recommendation. Price elasticity’s are found between zero and infinity. In the case of Susan Hansen increasing the tuition and reducing federal aid to students, the arc of elasticity is 0.8%. With an increase in tuition pricing and Susan’s projection of revenue increase, the price elasticity is inelastic. Regarding the price changes, the quantity demanded is less responsive to changes in price. Therefore, Susan should raise the tuition rates to $25,000. An example to compare is salt explained by Domazlicky, professor at SMSU. Salt is relatively inexpensive. If the cost were to rise a certain percentage, it would still be inexpensive. The other side of this is with tuition. Tuition is relatively expensive across the board. If tuition of Susan’s school were to rise by a certain percentage it would still be desirable for students, especially those who believe that they are getting a better, higher education because the cost of tuition has increased.
Misperception Theory In the misperception theory “a firm does not officially know if
Chelsea Turgeon
MBA 540 – Managerial Economics
May 18, 2014
Table of Contents
Determinants of Demand 3
Inelastic Demand 3
Misperception Theory 3
Recommendations 3
References 4
Determinants of Demand Elasticity
There are a few determinants of the elasticity of demand, one being the availability for substitutes. From the case, the data that was provided for previous studies of student’s application to colleges, projects an upward sloping demand curve. Students have many choices when choosing a liberal arts college. From the data previously taken, when the cost is higher, students believe it must be a better school.
Inelastic Demand Demand elasticity measures the percentage change in demand given a percentage change in its price (Brickley, et al., 2009, p. 111). When evaluating Susan’s analysis, it is important to first recognize what the arc of elasticity is from her recommendation. Price elasticity’s are found between zero and infinity. In the case of Susan Hansen increasing the tuition and reducing federal aid to students, the arc of elasticity is 0.8%. With an increase in tuition pricing and Susan’s projection of revenue increase, the price elasticity is inelastic. Regarding the price changes, the quantity demanded is less responsive to changes in price. Therefore, Susan should raise the tuition rates to $25,000. An example to compare is salt explained by Domazlicky, professor at SMSU. Salt is relatively inexpensive. If the cost were to rise a certain percentage, it would still be inexpensive. The other side of this is with tuition. Tuition is relatively expensive across the board. If tuition of Susan’s school were to rise by a certain percentage it would still be desirable for students, especially those who believe that they are getting a better, higher education because the cost of tuition has increased.
Misperception Theory In the misperception theory “a firm does not officially know if
References: Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics and Organizational Architecture (5th ed.). New York: McGraw Hill/Irwin. ISBN: 978-0-07-337582-3. Domazlicky, Bruce. Economics 101 Powerpoint ch.3. Southeast Missouri State University. Retrieved from: http://cstl-hcb.semo.edu/bdomazlicky/ec101text/chap3/chap3sec9.htm Wessels, Walter J. (2000) Economics (3rd ed.) Barron’s Educational Services. ISBN: 0-7641-1274-0.